Zee Telefilms: Hold and use price spurts to book profit

Recommendation: Hold and use price spurts to book profit

S. Vaidya Nathan

LIKE the soaps it telecasts, the change of scene has been spectacular for Zee Telefilms.

And there is nothing in the script that portends of better times. One positive factor is the move to `pay-to-view' basis. This should bolster the revenue stream and earnings in the next three-to-six months.

There could be some value gains linked to this aspect. Any such price trend, or if such re-rating does not emerge, can be used by shareholders to cut exposures over the next six months. Fresh exposures can be avoided as there is little evidence of any change for the better of corporate practices in the company.

Suitability

Being in a constantly-changing and highly competitive business, the Zee Telefilm's stock normally carries a high degree of risk. The opaque management practices have only heightened the company-specific risk factor. Only shareholders comfortable with such risk levels need stay invested in anticipation of an improvement in valuation levels. Others can cut exposure in the stock.

The ad slice gets smaller

In absolute terms, the ad revenues generated by the Zee Network may seem fairly sizeable at over Rs 500 crore. But it is competing not just with DD, at the top table. It has to contend with two nifty channels -- STAR Plus and Sony. This is important as it has a bearing on the likely growth rates for Zee.

In the past -- may be 12 to 18 months -- Zee seemed at top among Hindi channels and advertisers turned to it by default. It was the same for the viewers.

But Sony began catching up fast; the real change coming in the last one year. STAR Plus, backed by at least three blockbuster programmes, has virtually run away with the market, reflected in viewership ratings.

Of the top 50 programmes watched, STAR Plus has had a consistent viewership of 25-30 in most weeks the last six months. Nine of the top 10 shows have been its for quite some time now, the other is Sony's. This means a sizeable drop for Zee.

Viewership rankings for Zee have been rather poor in the last one year. But in the last few months, Zee managed to improve its position slightly and shares the non-STAR Plus slots in the top 50 with Sony. These trends mean that Zee is unlikely to be the default channel for Hindi viewers.

Equally worrying is the fact that in the expanded prime time, between 7.30 p.m. and 11 p.m., Zee lags STAR Plus by a long chalk and also trails Sony in quite a few specific slots. Despite a lot of effort, Zee has not been able to come up with a programme that can tip the scales in its favour again.

With Zee's dominance, thus, a thing of the past, there are sure to be implications for ad revenues in absolute terms and growthwise. Perhaps seeing the writing on the wall, Zee has moved to pay channel basis to augment its revenues.

The switch to pay

Zee desperately needs the revenues from going pay. Though there was some initial resistance in some markets, the move seems to have been accepted. This is likely to provide a sizeable one-time boost to the revenues and cash flows.

This is not exactly easy to quantify as the cable network system in its present form has immense scope for leakage. A better picture may be available when the company reports its performance for the July-September quarter. This could lead to some valuation improvement which should be used to book profits.

The company plans to raise the advertisement-subscription ratio from 80:20 to around 50:50. But, then, such a move is the stated goal of most satellite channels that have gone to pay mode.

The incremental volumes may help, but the scope to push rates may be limited in the Indian context. So the present jump may be one-time when viewed over a three-year time-frame. Unless Zee is able to come up with quality content, pushing further rate hikes may be a problem.

Only when unbundling of channels is possible, so that a consumer can pick and choose for pay purposes, can the subscription rates be raised sharply. However, in the immediate context, the subscription revenues will lend some stability to the Zee revenue stream.

A tough show ahead

The cash flows will also come in handy for Zee to revamp its content. The company plans to unveil a revamp and continues to have ambitious plans spanning wide areas. Its foray into regional language channels is yet to make a significant contribution. In the southern region, the company may be strained with competition hotting up.

Though the subscription basis is for a package of Zee Network channels, there is no doubt that the company's future is largely linked to its prime Zee TV which focusses on Hindi language programming. In all the other areas where the company has sought to start -- news, cinema, English movies, regional channels -- there is stiff competition.

Unlike Zee TV, which has competition breathing down its neck after becoming well-established, the network's other offerings are fledglings. It may take a while for these to contribute to earnings.

What Zee desperately needs now is one or two major programmes that can make the difference and bring it back into the reckoning within the top 20. Without breaking the hold of STAR Plus and Sony on prime time (especially the former), Zee's ad revenue growth may sooner or later face pressure.

This has to be viewed in the light of the slowdown in advertising this year and from a long-term perspective as well. In the last one year, Zee has not been able to come up with something that can tilt the scales in a big way in its favour.

Traditional concerns

Concerns at the operational level have become pronounced in the last 18 months. But a persisting problem is of corporate practices, which have proved detrimental.

A series of mergers and acquisitions of closely-held companies, constantly changing swap-ratio for the biggest merger within the group (that of Zee Telefilms and Zee Multimedia) and intra-group sales to prop earnings have been the more evident areas where considerable concerns exist.

Perhaps, the more serious cause is the recent diversion of funds. The promoter group -- the Essel group -- has dipped into Zee Telefilms. The latter provided a loan of Rs 220 crore to the Essel group ostensibly to buy stakes in some media companies.

But there are indications that these funds may have found their way to stock market. The preliminary investigation report by the Securities and Exchange Board of India has documented the diversion of funds to the Ketan Parekh group. At best of times, Zee has not had strong cash flows. And at a time when it is trailing competition, to divert funds raises concerns over the group's approach to sustainable growth.

The Essel group promised that the funds would be returned by June 30, 2001. But only Rs 60 crore came in by the said date. The promoters have sold one per cent of their holdings to an unnamed US investor to raise Rs 60 crore and repay Zee Telefilms.

Still close to 40 per cent would remain unpaid. The ease with which company funds have been dipped is bound to cast a shadow on valuation levels for some time to come. Unless there is a sea change in corporate practices, including transparency, the company may find it difficult to contain the impact of this factor on the stock valuation.

Performance and outlook

For 2000-01, the company reported a turover of 72.1 per cent to Rs 384.66 crore and sustainable post-tax earnings rose 70 per cent to Rs 138.18 crore. This year, there was no end-of-the-year transaction to boost profits. In 1999-2000, some of the library rights were sold to a group concern for a one-time profit of Rs 184.2 crore.

Going forward, there may be an upscaling of revenues on account of the switch to the pay mode and this could also lead to a one-time jump in profitability levels. But till concerns over the management practices are removed in a credible manner, cutting exposure may be the better option, especially on uptrend.